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The Personal-Finance Continuum

This is a guest post from Paul Williams, a fee-only financial planner and the founder of Provident Planning, Inc. He regularly writes about personal finance from a Christian perspective at Provident Planning.

About a year ago, there was nearly an epic battle between Ramit Sethi of I Will Teach You to Be Rich and Trent Hamm of The Simple Dollar. Ramit is firmly in the “earn more” camp of personal finance, while Trent tends to focus on the “spend less” side of things. Thankfully, no blood was shed as Trent chose not to engage Ramit in the challenge.

But I’m not here to discuss the politics of personal-finance blogs. I want to talk about something that Trent touched on in his post: People go through stages (or phases) of personal finance. J.D. has talked about this as well, so I’m sure most of you are familiar with the idea.

I like to think of these phases as a “continuum of personal finance”. It looks something like this:

The divisions between low, moderate, and intense effort are arbitrary, but you get the idea. There exists within each of those loose categories a wide array of options that will get you closer to achieving your personal-finance goals. In any given effort category, some activities will provide a larger reward than others. This is true for both sides of the “spend less than you earn” equation. Let’s look at some examples.

Low Effort
“Big wins” fit in the low effort group of spending less activities; these are the easy things you can do to start saving money. Some offer a huge reward, like negotiating your cable/satellite subscription or gathering several insurance quotes. These tasks don’t take much time but offer huge payoffs. Others offer a smaller reward (like switching out your regular light bulbs with CFLs).

There are also some low effort ways to earn more money. Switching from a low-interest savings account to a high-yield savings account doesn’t take much time or effort, but it can help you earn quite a bit more in interest. (On the other hand, switching from one high-yield account to another that’s only 0.1% higher usually won’t provide a very large reward.) Taking a few minutes to send in a rebate form may only get you an extra $20, but it’s easy to do.

Moderate Effort
Sitting down to plan your meals before you go shopping requires a bit of effort but offers a good reward. Changing you car’s oil can also take a bit of time but probably doesn’t offer nearly the same savings.

Freelancing, picking up extra hours at work, or starting a “side gig” (part-time entrepreneur) also require some moderate effort and will yield varying rewards depending on your situation.

Intense Effort
This is where the extreme frugality tips fall. Some will free up a lot of cash, like downsizing your home. But most intense-effort thrift activities? Not so much — and these are the kind that Ramit hates. (I’d put J.D.’s tip on using less hot chocolate powder in this category. No offense J.D.!)

But there are “earn more” techniques that fall in here as well. Starting your own full-time business takes a ton of effort but can be one of the highest-rewarding activities. Blogging, on the other hand, requires intense effort but usually doesn’t result in huge rewards unless your website becomes extremely well-known. Full-on career changes also require intense effort and the results can be mixed.

Those are just a few examples. I’m sure you can all think of other activities that fit in these loose categories and offer a range of resulting rewards.

What’s the Point?
What struck me is that none of these activities is inherently wrong or bad. Sure, you can argue from an economist’s point of view about opportunity costs and utilization. But if the activities you choose get you to your goal, were they stupid? You achieved your goal. You reached the desired result. You did it the way you wanted to. What’s so stupid about that?

“Do what works for you.” — That’s J.D.’s mantra ,and it’s a great philosophy when it comes to making choices on the continuum of personal finance. These categories of low, moderate, and intense effort are going to vary by personal opinion and preference. Your willingness to engage in any specific activity is going to depend on your situation, motivation, skills, and personality. Just because I wouldn’t follow the same path doesn’t mean your choice is wrong. It’s just your choice, and that’s fine. You’re doing what it takes to reach your goals. And that’s all that matters.

If you’re not approaching your personal finances in a way you enjoy, you’re going to be miserable, and that will have one of two effects:

You’ll give up because you hate the way you’re doing it, or

You’ll achieve success but experience unhappiness on the entire journey.

Don’t reject better ways of reaching personal finance success. But don’t beat yourself up because you’re not doing it the way someone else prefers. Do what works for you.

Not sure I agree – I think many people need to challenge themselves, just as JD is challenging himself in his many post entries.

“Do what works for you” sounds too complacent. Too easy to say that doing this or that “just isn’t me” although you are very well capable of doing something, but you just are too lazy or is slightly outside of your comfort zone.

I know several people who are total financial disaster zones, and they fail to get out of those situations mainly because they refuse to stretch or apply themselves outside of their comfort zones.

Maybe a it should read: “Challenge yourself, push yourself but in the end focus on what you are capable of doing sustainably”.

I read Ramit’s challenge post, and the thing that leaped out to me is that none of his “big win” tips would work for me, because I either already do them, or I don’t spend money in those areas (I have fee-free banking, no cable etc). Also, the “big win” on those things is a one-time thing – you can’t usually get a discount on a discount. So in a way, there is a case of diminishing returns. There are easy, low-effort things, but once you’ve done them, if you want to have more effect (either earning more or saving more), you’re going to have to man up and put in more effort.
At some point, you have to be careful of the diminishing returns – is the effort worth the money?

I try to save as much as I can, but I also live life. Some extreme frugalites would say I spend too much. However, I am not willing to sacrifice a lot of happiness in order to have some extra money in the bank. Its finding a balance that works for your family that can be hard. For instance, I am not inherently a spender. I do not have an expansive closet filled with clothes or a fancy car. But I will spend money on vacations for the family. Everyone has different priorities, and some may look at us and say we are crazy. However, my mantra would be ‘save as much as you can, but don’t forget to live a happy life along the way’. (Obviously that is within reason. You have to be responsible too.)

@ Jake(#1): I didn’t intend for “Do what works for you.” to mean you should just do what you feel like doing even if it means you won’t reach your goals. The phrase just means that there are multiple ways to do the same thing (pay off debt, save money, earn money, etc.). It doesn’t matter which path you choose as long as that path takes you to your goal. And for the record, I’m in the “earn more AND save more” camp.

@SF_UK(#2): I found the same to be true for me when I consider Ramit’s tips. I think his audience tends to have a record of extreme overspending or very little personal finance knowledge. They apply Ramit’s tips, save a bunch of money, and think he’s great. I don’t dislike Ramit – he does offer some good ways to save and make money. But I think his attitude toward frugality is shortsighted and quite abrasive at times.

@Everyday Tips(#3): You highlight a great reason for choosing your own path along the personal finance continuum. If you try to do everything that everyone recommends, you could easily end up miserable. You have to choose the things that will preserve or enhance your quality of life while still reaching your goals.

Is it just me, or do the green traces in the figure have the opposite slope of what they should? “Reward” (as I understand it) is cumulative, so as one expends more effort in any of the three categories, reward should increase – not decrease.

Another way to explain my point is as follows: If one can spend the minimum possible effort (left-most point on the abscissa) and achieve maximum reward in a given effort category, why would they expend any more effort (in a given effort category)?

The other issue with this figure is that it does not seem that the three traces should occupy the same range on the ordinate axis. The explanation from the previous paragraph applies similarly here: If one can spend the least possible effort (left-most point on the abscissa) to achieve maximum reward, why would one want to spend 2x or 3x the effort (minimum effort in another category) to achieve the same reward (value on the ordinate axis)? It seems like reward should be cumulative (and not discontinuous) across the category boundaries, as well as in each category.

I hope I am understanding this completely incorrectly, though, and that someone can explain it to me in much more simple terms.

I’m in the final stage of financial independence now. I’m also firmly in the earn more / low-moderate spending category. Although I enjoyed (most of) my jobs, the key was still to maximize income and not to inflate my lifestyle along with it. For the last few years of the 5 years it took to save enough to retire, my average savings rate was over 65%.

A commenter in a previous post said the following: “in my experience a person making $70k+ has: talent/education, drive, and/or a high tolerance for discomfort.” This is true and the same can be said for being more extremely frugal. The education comes from more frugal resources like The Tightwad Gazette or for a modern site that’s more on the extreme side like http://www.earlyretirementextreme.com – which although I wouldn’t personally go that far, it does make you question the limits of what you’re willing to do to attain financial freedom.

I’m becoming increasingly convinced that the key is to spend less on the things that aren’t important to you so that you can afford the things that are.

So if I can make some easy changes to allow myself to skip some of the hard ones–great. On the other hand, if spending money on ______ would be easy to cut out, but it’s important to me, it might be worth my time to deal with some of the intense effort activities.

@C(#5): There’s no perfect way to plot what I’m trying to say. This was just my best idea. To answer your first question, you might expend more effort in a given category because that’s what it takes to reach your goals. Most people will probably go for the big wins first (the easy things with a big reward). But there are other easy things that people will do to save or make money just because they’re easy.

To answer your second question, rewards aren’t always cumulative. Just because something takes more effort doesn’t mean it absolutely will give you more money. Take starting a business for example. It takes a lot of effort, but you could make a lot of money or lose a lot of money – no guarantees. I tried to sidestep the problem you pose by not using actual numbers on the Y axis and just called it “Reward” instead.

Don’t read too much into the chart. It’s not perfect, and I’m not sure I could make a perfect one.

Hm. You do have to discern between what’s worth the effort and what’s not. And clearly, that differs from individual to individual. For me, as an example, spending hours searching out coupons and clipping them and then running through traffic from store to store to cash them in is way too time-consuming and stressful to be worth the payback.

On the other hand, blogging — also a great time-waster — has its rewards. Though I don’t make much on Funny about Money, it does earn enough to free me from having to teach several adjunct courses a year, which I would otherwise have to do to survive in the new Unemployed Mode. So far, from FaM plus freelance editing my S-corporation has accrued enough that if neither of my fall courses makes, I’ll be just fine.

I earn next to nothing on FaM, but I also earn next to nothing on teaching, a much more onerous endeavor. On the continuum, then, presumably low-paid blogging makes more sense than low-paid teaching, because the latter requires more effort and is far more difficult.

Opportunity costs is exactly what your argument is about. Doing what works for you means taking into account opportunity costs and choosing one activity over another based on all the pros and cons. If meeting your goal is what’s important, there’s no conflict.

@David(#7): Great job summarizing the point. You can also apply that logic to the earning side of things though it’ll look different that way.

@Funny about Money(#9): It sounds like you’ve applied this idea to spending money and making money. I have to agree about coupons. Though I’m starting to think I should reconsider after reading about Jeffrey (J.D. wrote about him last week – the guy who spent less than $30 in May for his food).

@Mike Piper(#10): Hey, Mike! Hmmm, I’d put switching to index funds in the Low effort category if it’s in a tax-advantaged account and Moderate if in a taxable account. The reward could vary depending on what you were paying before.

I dont know about low effort/big reward on this item: Taking a few minutes to send in a rebate form may only get you an extra $20, but it’s easy to do.

Ive sent in dozens of these, including a VERY large one on a new set of tires in 2008, and never got a cent back. As far as Im concerned they are a waste of time and money and I dont bother any more.

I tend to come down on Ramit’s side. I’ve gained far more from aggressively increasing my salary-by over 10x since 1981- than by pinching pennies, though I employ both approaches. A lot of thrift related stuff just eats too much time. That said Ive menu planned since I was in college-never go shopping w/o a list etc. However, I never shop at thrift stores-takes too long, too much rubbish to go through-theres a reason this stuff is cheap, no longer bother with rebates, and rarely use coupons as I rarely buy the stuff I get coupons for. I no longer shop for recreation, which is a huge money saver.

There are a lot of things about this article that detract from the point it’s trying to make. First is the paragraph about some conflict between Ramit Sethi and Trent Hamm which mentions some conflict between them that’s never brought up again in the rest of the article and therefore seems superfluous.

Second is the giant graph in the middle that’s really confusing. It seems to show ‘reward’ decreasing sharply with effort until you hit some categorical boundary. this is firstly not a continuum at all, and secondly not what you mean. The graph should be a scatter plot, but even then, I don’t know if it’d help you make your point.

Third is the fact that all your examples are mis-categorized. A “big win” is not a low-effort activity, it’s a high reward activity. Becoming a medical doctor is a “big win”. Negotiating your cable bill is low-effort, sure, but it hardly offers a “huge reward”, it offers a small-to-moderate reward. Similarly, using less hot chocolate powder is absolutely *not* an “intense effort” activity. It’s almost a zero-effort activity. Because the reward is small does not imply that the effort was high.

What this article *wants* to talk about (I think) is reward *per* effort, but it implies the opposite by saying “Sure, you can argue from an economist’s point of view about opportunity costs and utilization.” (implying that we’re not going to do that).

Then it comes to the grand conclusion that if you meet your goals, whatever you did to get there was fine. It makes no connection back to its premises, such as whether scrimping on hot chocolate powder will ever, in an entire lifetime, help you reach a goal like buying a house or backpacking through Europe. If what you’re doing *isn’t* helping you to meet your goals, then sure, it’s not “inherently wrong or bad”, but it is a giant waste of time.

@Tyler(#15): Thank you for the feedback. I feel like I didn’t do the best job connecting all my thoughts on this article. I started with Trent & Ramit’s pseudo-conflict because that’s what got me to thinking about this idea.

Maybe there’s a better word than continuum, but I used it because the American Heritage dictionary defines the word this way: “A continuous extent, succession, or whole, no part of which can be distinguished from neighboring parts except by arbitrary division”. My point was that within the easy, moderate, and hard activities (which are very arbitrary) there is a range of rewards. A scatter plot wouldn’t have made that point. I’m not sure how to make a better picture to describe that idea than this.

I should have defined “big win” the way Ramit does because that’s the context I was using. The way he describes it, “big wins” seem to be the easy, high reward activities (per unit of time/effort). J.D.’s hot chocolate example might not have been the best for extreme frugality, but it was an example of the ideas that come from that mindset. Personally, it would take a lot of effort to drink down a whole mug of weak hot chocolate.

I do appreciate your commentary though, and I’ll try to use your points to improve future articles. Thanks for taking the time to craft such a long and thought out reply.

oh, you mean utility maximization– in lay terms, do what makes you happiest
utilization just means you use something

And again, what you’re saying is not at odds with utility maximization. Optimization is related, but different… you can utility maximize without optimizing, especially if there is effort to getting information… the “second-best” can be utility maximizing in an imperfect world. (In psychology this would be the argument that “satisficing” provides more happiness than optimizing in a world of too many choices.)

I agree with Tyler, the graph is terribly confusing and most of the examples are just wrong.

My favorite one was starting a business and using less hot chocolate powder as both “intense effort” activities.

EDIT: a better way to approach this may have been referencing the “stages” JD talks about and giving an example of varied effort/reward instances found in each stage. Like someone in the getting out of debt stage could see setting up a debt snowball as a moderate to intense activity, but with “big win” potential should he complete the goal.

Paul, when discussing Ramit, you have to keep in mind that the real Ramit (the person) has a different “persona” than the blogger. I’ve known Ramit personally for years…before he had a popular blog. And he really does live a frugal lifestyle personally.

He also recently made $127,000 in one day doing a launch on his blog. Again, I know most of the “behind the scenes” on that and there were weeks of preparation and work that went into it, as well as weeks after where he was working with his students. But your priorities change when you make that much money in a day (I also know this from personal experience.) You start spending a significant amount of money just trying to gain back time. And–not to put words in Ramit’s mouth–but I think that’s probably where he is right now.

My only complaint about intense frugality is the amount of time some of the tips take to implement versus the 5 cent savings. I think life is about balance and if you go too crazy on the little stuff, the big stuff (like time with family and friends) will pass you by…

This post makes more sense if you skim it because you get his point without trying to figure out exactly how he’s trying to make it.

Tyler has a point. In my job we have a risk equation that looks like “Likelihood x consequence = Risk” You give each failure item a score of likelihood and a score of consequence (1-5 or 1-10 depending on the resolution you want) and you get a numerical rating of how you should tackle mitigation of your risks. I think this is what he is talking about “money saved/earned x effort = payoff”. I think this is where the earn more/spend less give the rest of us a headache. There will be activities that earn more per unit effort and there will be activities that save more per unit effort. It doesn’t matter whether you are earning or saving, the point is to have a positive payoff.

If course these are simplistic and don’t take into account risk, which is what you are talking about wrt starting a business. I know how much I’m going to save if I don’t eat out tonight. I don’t know how much I’m going to earn if I open a restaurant and start cooking for other people. Anyone sane takes the risk of failure into account as well. Maybe that equation would look like “money earned x effort x likelihood of success = payoff” where likelihood of success is a number between zero and 1.

@KevinM(#18): Thank you for suggesting a positive change to the article. I agree with you. I intended to do that and somehow got off track. It’s hard to see how the stages apply in my article as it is written. I think how you categorize activities will change as you move through the stages J.D. has discussed.

@Erica Douglass(#19): Thank you for sharing your insight into Ramit’s personal life. I was commenting on how he comes across in his blog. I would not fault him for spending more money to regain his time at this point. He can afford it and it makes sense for him. I think the problem is that he is not the rule – most people cannot afford to give up frugal choices to regain time. Too often when I read his articles on frugality, it feels like he’s telling everyone to stop trying to be frugal and just focus on making $127,000 in one day. Is that a realistic goal for the majority? I’m not so sure.

I stopped reading Trent’s blog when he gave illegal and unethical advice, they denied it and kept digging his hole, and then he secretly changed part of his original posting while deleting comments from lawyers and others.

Trent suggested that people ensure that their children qualify for more financial aid by “giving away” any money that the kid has to someone like an uncle and then maybe the uncle would “decide” to return the money at a later date. Sketchy. And illegal. And greedy.

@Shara(#22): Your comment about skimming made me laugh. I think you’re spot on though. I did a terrible job making my point because my point is so simple. I think I would change your equation though. (Reward/Effort) * Risk = Payoff Using something like that could help you rank your choices in a better way. Should I chase interest rates on my savings or learn how to cook better meals? I’ll stop with examples there because I’m apparently handicapped in generating such things.

Erica wrote: Paul, when discussing Ramit, you have to keep in mind that the real Ramit (the person) has a different “persona” than the blogger. I’ve known Ramit personally for years…before he had a popular blog. And he really does live a frugal lifestyle personally.

I want to highlight this comment because from my experience, it’s very true. I’ve met Ramit once (twice?), and talked to him several times. He really is a frugal fellow. He just plays a role on his blog because he really does believe Big Wins are more important, and he’d rather have people think about them than pinch pennies. But I’d be willing to be he’d tell you that both are important in his own life.

Erica makes another good point, though, and it’s one that she, Ramit, and I have all discovered (as have many others): There’s only so much you can do to improve your finances by cutting costs; there are far greater rewards to be had by increasing your earning power. And when you do that, frugality becomes less important (not unimportant, but less important). I try to stress this again and again, but I feel like the point never gets across, or that people dismiss it because they think it doesn’t apply to them: If you want to improve your financial situation, the biggest gains are to be had by increasing your income.

Finally, thanks to every for offering constructive criticism for Paul. I feel like you’re doing a good job of not attacking him, but instead sharing what you find confusing about his article. Along with the guidelines I posted last weekend, I’m going to file this post away as a sample to show prospective writers. I want people to be able to see an example of how sometimes what they think they’re saying isn’t actually what they’re saying.

For his part, Paul’s being a good sport about this, and seems to understand this he didn’t communicate his point as effectively as he wanted. So, even though the article may not be perfect, it sounds like it’s a productive discussion for everyone involved.

It comes down to other variables as well. For example, if you detest your job and love to go to yard sales, saving more might not yield as much, but life is nicer. If you don’t have enough time to spend with kids, working more hours is a negative, whereas many frugal activities can double as quality time with kids.
Just earning more money is not so easy in the short term, especially with the scarcity of jobs. I know a woman who just finished two grueling years of school to become an RN, and then was immediately offered a position at $18 per hour. It would be hard for her to save that much additional money annually, are her current spending habits are fairly modest. But it took her two years to make that change, plus the cost of schooling.
In contrast, saving money is immediate, like giving up steak for vegetarian meals. Ceasing some expensive habits takes no effort, such as stopping the recreational purchase of clothing.
It’s also a sad truth, that some people just don’t have the IQ to earn more money. Some have other limitations… I know a middle-aged guy who suffers from chronic depression and has a lazy eye… no wonder he has been unemployed for about a year. But anyone can learn frugality. And even if frugality doesn’t bridge the financial gap, it can go a long way to making life more pleasant. Frugality can be delightfully enriching and fun. For me, I intentionally work less to free up time for some frugal activities I really enjoy.
I agree it is a balance and this will depend on a wide range of variables in each individual situation. But it is not about which direction builds the greatest net worth. It is about which direction most enriches your life.

I cringed when I read “Along with the guidelines I posted last weekend, I’m going to file this post away as a sample to show prospective writers. I want people to be able to see an example of how sometimes what they think they’re saying isn’t actually what they’re saying.” But I agree, what I thought I was saying wasn’t what I actually said. I failed in that respect.

I wholeheartedly agree that you can get the biggest gains by increasing your income. The problem I see with emphasizing that fact too much is that so many people haven’t learned the important parts of frugality yet. They focus only on income and ignore their expenses. Then, ten years later, they wonder why they still don’t have any money even though they’re making three times as much as before.

Once you’ve covered the “big wins” and stopped wasting money on stupid, unimportant things, frugality becomes mostly about those intense effort-low reward activities. At that point, you should focus primarily on the earning side of things while maintaining the good habits you learned from being frugal.

“If you want to improve your financial situation, the biggest gains are to be had by increasing your income.”

I think this is probably true for most people…
but living in LA this past year has reminded me that spending can be almost infinite too. Most of us don’t have a whole lot to cut, but if you’re making 400K and spending 500K (and working 80-100 hour weeks), you’ll probably have bigger gains from cutting some than from earning more. (Yes, real people out here are in that situation, and not just movie stars.) At my comparatively piddly (but still high compared to the US average) income I’m a lot happier because I have less debt, smaller fixed expenses, and work fewer hours.

Really the finite resource is time. We can allocate it to earning or to cutting. Depending on what we’re currently doing either earning or cutting will have larger pay-offs.

The trouble comes in knowing what works for you. Some people think they hate budgets but have never kept one just like some people think they hate running but have never done much of it. Sometimes you have to give something a fair try to find out how you really feel about it.

I think you should do what works for you but also keep an open mind. If you see something that works for someone else, you might want to try it out. Perhaps there’s a reason why it works for them.

I think that there are limits on how much most people can earn in a given month or year (depending on education, time, family responsiblities, location and especially now – the overall income). As a result, I think that for most dramatically increasing income is difficult to do especailly now.

I think it is more realistic for most to get a handle on needs, wants, etc. Try to reduce the big costs (homes, car, rent) if you can, a lot of times people are tied into these costs unless they want to walk away from a home – although I’m all for selling an expensive car and getting rid of a car payment.

I agree that one can take some time to negotiate non-fixed costs, things like cable and insurance costs and those negotiations can pay off over time. Saving $20 a month does add up over the year. We are not super frugal, but we limit the amount we can spend via an allowance system which allows for fun, entertainment, shoes, etc. but cuts us off at a certain point.

One area that we really focus on is avoiding new recurring costs and keeping our spending plan as is to avoid lifesyle inflation. While I’d love to have someone clean our home we won’t sign up for a regular service but we have had a cleaning company come in on a one time basis before a big event or company. Same with things like the bug guy. Although our income may have increased over the last few years we have not increased our spending plan or budget, except to try to push more money to savings and investments.

“If you want to improve your financial situation, the biggest gains are to be had by increasing your income.”

I get what you’re saying, but at the same time we are always talking around here about how people can make $250k/year and still sink into debt. I don’t read Ramit, and perhaps he touches on it, but frugality is a lifestyle choice. There is always something bigger and better that you can have. You might have the yacht but want the private island to park it at. While your income is limitless, so are things to spend it on.

Everyone defines frugality differently, but at its core it is giving up your wants for the sake of saving money and we all need to exercise that. Many people take it to extremes, and even around here some of us raise our eyebrows at what some people do to save a few cents. But there are extremes on each end. People bringing home $20k/yr are going to get a big bang with a coupon, making it more worthwhile, but they should concentrate on making more money because they have a lot of room to grow. People bringing home $150k/yr won’t get as much with a coupon, but the likelihood of being able to make more money is diminished. While it’s POSSIBLE to make more, it isn’t terribly probable (at least not without major personal sacrifices).

@ Paul

You can divide or multiply to your heart’s content, you just change the scale you are comparing it to, but they will still come out along a line. You just have to understand your equation to determine if high is good or bad.

I’m at a stage where I’m trying to come up with ways of earning more that will be worth the effort, but I can’t see any that don’t require a significant time investment. At least that I find moral. In my current line of work I can’t make any overtime, so I’d have to ask for a raise. But if I’m getting paid a very reasonable rate there is only so much room for increase. Right now the best strategy for me is to keep working with the small increases in salary while keeping expenses low and sticking the rest into high interest accounts. Anything else takes years to gain momentum, or cuts into actually having any fun outside of work.

Hey all. Fun post to read and comment on! I am definitely in the “increase your income” and “cut the big items” rather than “cut the powder in your hot chocolate, make your own detergent” croud. But then I’m a single young professional living in a HCOL area, so its a bit easier for me to do that then it would be for a stay at home mom with 5 kids living in rural Idaho.

I switched jobs last year for a 40% raise, and by keeping a 10 year old car I don’t have any auto expense except my small insurance policy. I also “pay myself first” and don’t stick to any budget for expenses, just make sure I don’t spend more than what’s left. I do track my spending categories though out of habit (hard to break that!).

Paul, thank you for being a good sport about the feedback you’ve received. There are some commenters who seem to be offering constructive criticiscm with great gusto today.

I agree with the mantra of “Do what works for you,” with emphasis on the DO and the YOU. Be active, and figure out what works for you.

This changes as your life changes. In my 20s and early 30s, I put a great deal of emphasis on the side of increasing income. It took a great deal of time & effort away from home. In my later 30s and 40s, as my husband and I had a family, we’ve moved our efforts to controlling lifestyle inflation. I’m not so interested in increasing my income, as I’d rather spend the time with my kids. I still engage in frugal lifehacks just because I enjoy them. I expect my approach to money will grow and change again as I move to my next life stage.

Paul, fwiw I had no trouble at all with the graph, perhaps because I am not a mathematician and I read it as follows:

first we do the low-effort things with high rewards, gradually tapering those off as the rewards become less, um, rewarding;

second we do the medium-effort things with high rewards, gradually tapering off;

third we do the high-effort things with high rewards.

There’s only so many different things we can try in each category, depending on our personal situations. Eventually we have to shift gears and move into a new category. Most of us start with low-effort things because we need an easy “win” in order to build momentum.

So while the structure may not have been “optimal,” just wanted you to know that for this reader, at least, the graph was a non-issue.

Funny story. I picked up my two daughters’ bedroom (not all their fault; had a friend over who didn’t help them pick up). I kid my 7 year old daughter when she walks in “I think you should give me some money for picking up your room”. Rather than be insulted she says “how much?” I say “I don’t know, 50 cents?” She runs out the room and comes back with 2 quarters from her piggy bank. I tell her I was just kidding, but she insists that I keep it. She also mentions ways she is thinking of making more money and states she will hire a housekeeper when she grows up! We are doing alot of work for her to be self-responsible for cleaning up after herself, but knowing her personality she may very well be the kind of person who would rather earn extra money and pay someone to clean her house than do it herself.

Increasing one’s income is a swell idea. I hear that advice all the time. What I *don’t* hear is that it isn’t always POSSIBLE to do this.
Maybe you live in an economically depressed area with few jobs in general, most of which pay minimum wage.
Maybe you don’t have the skills needed to increase your income but can’t find room in your life right now to get those skills. (I’m thinking about folks with long commutes, small children, lack of a partner, no funds to pay for training, et al.)
Maybe you have small children and it’s hard enough to be away from them for 40 hours a week, let alone think about taking on an additional part-time job.
If you’re facing circumstances like these, the best option RIGHT NOW might be frugality vs. income enhancement. As an example, if you’re a single parent who’s just about making the bills and handling the child care it could be more cost-efficient to “find” an extra $200 in the budget each month through frugality vs. working a couple of hours every night at the corner store (especially if you had to pay for child care).
“Earn more money” — if it were that easy, everyone would be doing it. It’s a great goal. But it might not work for you.

@Donna (#37)
You’re absolutely right, of course. Sometimes a person a can’t increase their income, for whatever the reason. Still, I think that it’s vital that folks include this in their mental calculus. Most people just forget about it, I think. And I think you are a great example of finding all sorts of little ways to make more money (which is why I included your story in my book to represent this concept).

I’m in the camp of ‘Earn More,Spend Less’! I agree with Donna that it might not always be possible to earn more.I think most of us have a problem with the ‘Holier than thou’ attitudes of extreme frugalists and extreme earners. I believe it is possible to have a happy middle where you don’t have to worry how much you skimp or have a price tag on time(create more money).
Balance keeps me happy and by being happy, I’m not Grumpy

From my experience teaching, “do what works for you” is dangerous to tell a student. I understand the sentiment, but phrasing it so softly means that many people will give your advice a cursory try, then revert back to their old ways when they hit the first wall that inevitably comes with any attempt to change habits. They think, “it doesn’t work for me,” when really they never gave it a chance to work. Since many of us don’t have have a personal coach to keep us on track, “do what works for you” should come with the disclaimer that you need a sufficient amount of time to see if something can actually work for you.

@Shara(#31): I thought dividing worked better for comparison purposes. For example, if an activity takes 10 hours and saves $5 that’d be a payoff $50 if you multiply but only $0.50/hour if you divide. It makes more sense to divide if you’re trying to compare that to something that takes 2 hours and saves $10. Multiplying only gives you a payoff of $20 when you’re actually getting $5/hour for your efforts.

@HollyP(#34): I’m glad to get the feedback. It does seem I did a particularly poor job in relating my idea in this article, but the feedback has been helpful and will give me specific areas to improve upon in future articles. I think your comment about stages relates well to chacha1′s comment (#35).

@chacha1(#35): Hooray! So my graph makes sense to at least one other person. Your interpretation is one way of seeing it, and I think it holds true for many people. It’s easy to start with the low effort things – especially if they offer a good reward. That’s how my idea relates to the stages J.D. has discussed in the past. After you’ve done so much improving in your personal finances, you’re in that final stage where you maintain some effort but there’s not really a whole lot more you can do to improve.

@Donna Freedman(#37): Thanks for commenting! Your point is also something I was trying to address in the post. Just because Ramit is telling you to focus only on “big wins” and earning more doesn’t mean you’re a failure if you don’t do it. And just because Trent tells you to use only three squares of toilet paper (or whatever he said in that post) doesn’t mean you flunk frugality school if you don’t do it. There’s more than one way to skin a cat – and you might not have the resources available to skin it the way others tell you. That’s where the “do what works for you” comes into play.

@Sushi(#39): The “holier than thou” aspect is what sparked this idea for me when I read about Trent & Ramit’s little battle. (That’s also why I included it in the post.) There is a middle ground where you do some of what both camps suggest. Following this path can help you achieve your goals and maintain the lifestyle you want. Just because you don’t strictly adhere to one type of advice doesn’t mean you’re doing it wrong.

@TR(#40): Excellent point! I would hope anyone who’s serious about improving their personal finances wouldn’t give up so easily, but I can see how that can happen if they’re not fully aware of the bumps in the road they might face. It’s easy to tell someone all the “right” things to do. It’s harder to prepare them for all the things that could go wrong. Good teachers don’t just tell you how to do something the right way – they also prepare you for the pitfalls and common mistakes.

For most people, it takes only low to moderate effort (in time, though not necessarily in willpower) to keep their spending in balance with their income. High effort frugality is required only if you are aggressively saving for a very early retirement or if you want to spend way beyond your means in some particular area.

Conversely, low to moderate effort attempts to increase your income typically yield very limited results, unless you have a highly demanded skill. If it were easy to make a lot of extra money, many people would do it. High effort attempts to increase your income, on the other hand, can be very successful and make the greatest impact on your financial situation. But they require a level of time commitment that shouldn’t be underestimated and is not necessarily possible for all people at all stages of their life.

Some interesting beliefs I wanted to highlight: “if you’re making 400K and spending 500K (and working 80-100 hour weeks), you’ll probably have bigger gains from cutting some than from earning more.”

and a similar comment:
“People bringing home $150k/yr won’t get as much with a coupon, but the likelihood of being able to make more money is diminished. While it’s POSSIBLE to make more, it isn’t terribly probable (at least not without major personal sacrifices).”

If you’re running your own business, this simply isn’t true. Here’s what happens when you hit the 6-figure mark with your business…you have some things that work and some that don’t.

Assuming you focus on the replicable processes that work, you can easily go from $100K to a million or more in just a year or two.

When my business was generating about $400K annually, I sat down with a business coach for a day. I paid a princely sum to do it, but it was worth it. He helped me figure out what was working and what wasn’t working. A year and a half later we were close to hitting $1M in annual revenue, and that’s when I sold the business.

Businesses do that. If you can make $400K, it’s a matter of finding the systems inherent in your earnings, and duplicating them (with possible outsourcing and/or hiring involved.) Then you make $800K in a year or two.

If you’re working 80 hour weeks at that point, you need to let go of the reins and hire people for many of your replicable systems.

I know some of you think I’m loony, but this comes both from personal experience as well as working with many other business owners who are in that “6 figures but not yet a million” range.

-Erica

P.S. There are a whole lot of business owners out there who are making well into 6 figures and not even working a full 40-hour week…

@45 That may be true if your income is from a business that has room to grow. Not if you’re a high powered lawyer couple with kids that you already never see. That’s not replicable, at least not without a lot of time spent building infrastructure (which will not generate the 250K salary before you drown in debt).

@Erica(#45): I understand what you’re saying and I agree with you. If you focus on the right things when you’re already doing well, you can compound your success. I think most people are commenting from the viewpoint of those who are not business owners and have no desire to be. As Nicole points out in her comment (#46), some business can’t scale very easily. Professional services (like attorneys, CPAs, financial planners, etc.) seem to fit that category. If people want face time with you, it’s hard to outsource that aspect. (Though you could certainly outsource everything else.)

@C (#5): It’s not just you. I think I get what Paul is saying, but I disagree with the way he drew the graph. Perhaps if this were a graph of the first derivative of the function, it would work. I would probably make the graph with three plateaus, because at each level of effort, I think one reaches a point at which one cannot squeeze out another penny without moving to a higher level of effort.

I actually don’t think Ramit and Trent are all that different. Ramit wants to market his tips as something other than “frugality” because he writes for an audience that considers frugality to be boring, but most of his “big wins” are things that Trent, JD, and lots of other frugal PF bloggers have recommended as well. Like SF_UK (#2), I don’t find many of these tips useful because I have already done most of them or prevented them from applying to me (e.g., I have no credit card debt, so there’s no reason for me to get my interest rates reduced). Once the big expenses are under control, you have to do the small things if you want to save more money.

Sara, you actually picked up on something another reader emailed to me. A graph like you describe might have made more sense to more people.

I agree that a lot of Ramit’s “big wins” are the basic things any other PF blogger would write about. I’ve never found such tips very helpful for the same reasons as you. The higher effort/lower reward frugality tips can get boring and extreme. I really like The Complete Tightwad Gazette, but there are several tips in the book that just make me shake my head.

Yeah, it’s simple, that’s why everyone is doing it. Lots of things are possible, not all are probable. Successful businesses require more than a formula. There are always ways to make more money, but not all are probable or, as Donna pointed out, possible due to given circumstances. And if everyone could make a million dollars a million dollars would no longer be a good salary, it would be average and buy average things. By definition there will always be a tapering off at the top of the income rung. Therefore my point is valid. PLUS there is always going to be risk involved in starting a business. The reward is high, but so is the likelihood of failure.

$150k/yr is a lot of money (in most locales), and people making that aren’t going to have many opportunities for making more money. It isn’t usually worth their time to get a second job, many are salaried or can’t work overtime, and as pointed out above, quitting and going into business for oneself takes on a lot of risk.

Regarding Nichole’s point, that is valid as well. Okay, so in your scenario you’re now making $1M instead of $400k…and your expenses are at $1.1M instead of $500k. The opportunities to spend money are endless. One must still control spending, no matter the income. That is a logical fallacy a lot of people making that $1M make. They assume that much money will never run out, and easily over spend it. That’s how so many celebrities wind up bankrupt.

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